Effective Investment Vehicles for Africans in Diaspora
08 January 2020 * 7 min read
Written by Paschal Amaechi
Africa, the world’s second-largest and second most-populous continent is a continent that continues to attract attention albeit mixed. The accelerated growth and acceptance of democracy across most of the continent has brought about heightened interest, at least from an economic standpoint. The continent is forecasted to experience a 4% GDP growth in 2019, up from 3.5% in 2018 according to the African Development Bank (AfDB); and a real GDP growth 9% faster than the world average according to the International Monetary Fund (IMF). Amidst these developments, corruption, a lack of clear policy direction and a general lack of understanding of the heterogeneous market continue to hamper institutional investments.
The muted success in attracting Foreign Direct Investment (FDI) has however not stopped Africans in the diaspora from continuing to contribute towards its growth. Remittances to Sub-Saharan Africa rose to $45 billion, a growth of 9.8% in 2018, and growth is expected to continue in the coming years.
Many diaspora Africans and retail investors across the globe however continue to seek effective avenues devoid of scam to invest for a decent return on the continent. This article would enumerate a few of such, looking at them from two broad categories: capital preservation and capital appreciation.
Capital Preservation is a conservative investment strategy that allows for securing the initial capital being invested, while earning returns, usually as interest with rates above regular savings account. It makes use of safe short-term instruments. This investment approach is favoured by people with low to medium risk appetite like retirees and people setting aside funds for specific short-term projects. A major upside to this method of investing is that initial capital typically is preserved while generating additional returns. This can be as high as 15% in some African countries. A major downside to this method, however, is that it is more appropriate for the short-term and not the long-term. Over time, the returns could get eroded by inflation.
Some of these effective instruments include:
Eurodollar Bond. This is the United States dollar denominated, issued by oversea companies, international syndicates and foreign governments as a source of raising funds. It is usually held by institutions outside of the United States and the country home of the issuer offered at fixed interest rates. It grants a clear fixed-payment structure to the issuer in the long term. A big benefit of this bond is its limited exposure to regulatory restrictions. This instrument is increasingly used not just by diaspora Africans, but Africans at home who fear a depreciation in the value of their local currency as a safer way of preserving value.
Treasury Bills. Otherwise known as T-Bills are short-term debt instruments backed by the issuing government. They are sold by auction through both competitive and non-competitive bids. The maturity period of Treasury Bills is for a maximum of 52 weeks, with other varied maturity periods including 4, 13 and 26 weeks. The longer the maturity period, the higher the interest rate; with interest typically exempt from tax. This instrument is generally one of the safest ways to invest, with a downside of losing out on the fixed interest rate accruable to a possible rising interest rate; meaning, lower yields vis-à-vis the overall market.
Fixed Terms. This is a fixed-term financial instrument where investor funds are locked in for a pre-determined period after which they are paid both principal and interest. Investors are generally not able to withdraw their funds once deposited, at least, not without penalty. Towards the end of the investment period, the investor typically instructs the financial institution of their interest or lack thereof in reinvesting their funds; otherwise, the funds are automatically rolled over for another investment cycle. This fixed-term instrument is also applicable to debentures and bonds, and have terms in the ranges of short, intermediate and long.
Money Market Funds (MMF). This is a type of Mutual Fund investment that offers competitive interest rates with a focus on high-quality, highly-liquid instruments including government-backed securities like Treasury Bills and money market instruments like Collaterised Repurchase Agreements, Bankers’ Acceptances, Certificates of Deposit and Commercial Papers. On the investment spectrum, this is considered very low-risk. The basics of the design of this instrument include regular payments to investors providing a regular source of income. However, it is highly advised for use as a short-term store of value, as interest is susceptible to erosion in the long run.
Transportation. As a result of highly underdeveloped infrastructure in Sub-Saharan Africa, the cost of transport inevitably is high. For retail investors that may not want to or not have the means to invest in the construction of bridges, roads, and the likes, investment in means of transportation offers an attractive alternative. Some of the few organized platforms that offer this opportunity include South Africa’s FlexClub. FlexClub is a fully managed scheme that allows investors to make returns from the burgeoning cab-hailing industry by purchasing vehicles for Uber drivers usually on hire purchase basis. In return, they get fixed income and regular simplified reports on fleet performance.
Capital Appreciation is a more aggressive investment strategy with intent on increasing the initial asset value as paid for by the investor in the market. This approach is usually favoured by investors with medium to high risk appetite, and aims for multiples of original sum invested as against marginal increments as in Capital Preservation. It, however, exposes the funds being invested to risks including loss of capital. Done aright and compounded over time, it generally yields better returns in the long term, well-surpassing inflation.
Some of these effective instruments include:
American Depository Receipts (ADR). This is an investment instrument for people living in the United States. It comes in the form of a certificate issued by a deposit bank representing a specified number of shares in a foreign stock. ADRs are traded in United States stock exchanges including the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) and the NASDAQ as well as over-the-counter (OTC). It gives investors the convenience of trading in US denominated currency, without worries about exchange on the forex market and the luxury of portfolio diversification. Investors in this instrument should however watch out for double taxation.
Exchange-Traded Funds (ETF). ETF are index-based investment schemes based on the underlying assets of correlating indexes traded on an exchange like a stock. For instance, the Oil Index (OSX) is a collection of securities (shares, bonds, etc.) of oil companies. Other types of indexes include technology and banking. It is often considered one of the easiest forms of investing and has the added advantage of built-in portfolio diversification and generally cost less than ADRs and foreign stocks traded on foreign exchanges. Some popular African ETF include the MSCI South Africa Index (EZA), Market Vectors Africa Index ETF (AFK) and Global X Nigeria Index ETF (NGE).
Stock Exchange. This is a marketplace that allows for entities to trade securities, commodities, derivatives and other financial instruments while allowing for fairness, order, and efficiency in trading and price information dissemination. The stock exchange enables companies to raise money and entities to own a part of a company or corporation with a proportional claim on its assets and earnings. These entities have a distinct and independent existence and could be individuals, organizations, institutions, establishments or bodies. Some popular African stock exchanges include the Johannesburg Stock Exchange (JSE), Nigeria Stock Exchange (NSE), and Egyptian Stock Exchange (EGX).
Mutual Funds. This is a kind of investment vehicle that enables a number of investors including small and individual investors to contribute to a pool of funds which in turn is invested in a number of securities. Different fund managers tend to have different funds for varied investment goals. Some focus primarily on money market instruments, some on equity markets, some in bonds, some on other specialized securities, while others focus on all of the above in different blended formats often in line with investor risk appetite. Some of the distinct advantages include liquidity, diversification, minimal investment requirements, and professional management.
Real Estate. Real Estate investment allows for investing in tangible properties that is, land, and anything on it including building, flora and funa, as well as natural resources. Broadly speaking, investment in this area falls under residential, commercial and industrial, offering both income and capital appreciation. Real Estate investment can either be made directly that is buying properties or indirectly by buying publicly traded shares in Real Estate Investment Trusts (REITs). In Africa, the REIT market is underdeveloped as compared to the rest of the world but continues to develop. Today, this instrument can be accessed in Ghana, Kenya, Morocco, Tanzania, Nigeria, and South Africa. Other countries include Rwanda, Namibia, and Uganda.
Agribusiness. Agriculture is said to be the earliest form of subsistence; investment in this area continues to generate good returns — even in Africa. For people living outside the shores of the continent or even those living therein with limited access yet a desire to invest, there are a few ways to get involved. Some of the advanced forms include engaging in the Futures Market, whereby participants buy and sell agricultural commodities and futures contracts in auction style. A few known Futures Market are the New York Mercantile Exchange, the Kansas City Board of Trade and the Minneapolis Grain Exchange. Other less advanced forms of investment include the use of online crowdfunded agriculture platforms like FarmCrowdy and ThriveAgric in Nigeria.
Startup Investments. Considered one of the riskiest, startup investments still remain one of the most rewarding forms of investment — even in Africa. In the past decade, there has been increased international interest in African startups with a number of them getting funding from the seed through Initial Public Offerings (IPOs) stages. United States and European accelerators like YCombinator and SeedStars respectively continue to invest in early-stage African startups often technology or technology enabled. Retail investors including diaspora Africans can today invest as well taking advantage of platforms like VC4Africa. Bear in mind however that exposure to capital loss, especially for African early-stage businesses is very high.
Concluding, smarter investments can continue to be made in Africa even by retail investors and especially by diaspora Africans. A good understanding of the means, as well as knowledge of each merits and demerits, is key to success. This article, while not constituting financial advice is a starting point.
Paschal Amaechi is Business Advisory Professional, Product Manager and Project Manager with over a decade experience working on products both in Africa and Europe. He has done work for 3 Fortune 500 companies and managed products across the size spectrum of entities including startups, scale-ups and enterprise.